‘BB’ ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time. However, business or financial flexibility exists that supports the servicing of financial commitments.
Fitch said it rates Hexaware based on the consolidated group profile of CA Magnum Holdings (BB-/Positive), Hexaware’s 96% parent, as it assessed access and control and legal ring-fencing as ‘Open’ under the stronger subsidiary path of Fitch’s parent and subsidiary linkage rating criteria.
This approach constrains Hexaware’s rating at the same level as that of CA Magnum, it said in a statement.
However, Hexaware’s Standalone Credit Profile (SCP) – excluding the impact of CA Magnum – was assessed at ‘bb’.
The SCP reflects the company’s mid-tier Indian IT market position, strong growth, improving Ebitda margin, robust free cash flow (FCF) generation and a favourable industry outlook, the statement said.
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Fitch said it expects Hexaware to keep the minimal gross debt and a net cash position.
However, the ratings are affected by its small revenue and Ebitda scale compared with industry-leading peers, it added.
Fitch said Hexaware has strong execution ability and exhibited stronger growth than peers.
It has solid long-term relationships with key customers because of moderate-to-high switching costs, differentiated product offerings and high customer satisfaction.
Still, annual revenue of around $1 billion is significantly smaller than higher-rated peers such as Tata Consultancy Services Ltd (A/Stable), HCL Technologies Ltd (A-/Stable) and Wipro Ltd (A-/Stable) – each of them has annual revenue of more than $10 billion, it added.
“We forecast Hexaware’s revenue to rise by 12-14% in 2022-2023. Revenue in US dollars rose by a CAGR of 14% over the past 10 years, beating the Indian IT industry’s high single-digit percentage growth. This was supported by stable management that focused on differentiated offerings and increasing wallet share in customers’ IT budgets,” Fitch said.
Growth was mostly organic – Hexaware’s only acquisition in the past decade was Mobiquity Inc., which contributed about 10% of its revenue in 2020, based on Fitch’s estimate, it added.
“We believe Hexaware will continue to outgrow the industry on strong execution and a total contract value (TCV) pipeline. We expect Hexaware’s signed new TCV (excluding renewals) of $780 million in 2020 and $580 million in 9M21 to support its growth.
“We also believe Hexaware’s access to Carlyle’s portfolio companies will boost revenue growth. However, Hexaware’s growth may be affected if the pandemic further affects the global economy with rising cases of virus variants,” it added.
Fitch said it forecasts Hexaware’s Ebitda margin to be around 17% in 2022-23 (2020: 16%; 2021 (estimated: 18%), driven by higher revenue from offshore or nearshore delivery, which is more profitable than onsite delivery revenue, a change in product mix and economies of scale.
It will be partially offset by salary hikes amid greater competition for talent and travel resumption, it added.
“Fitch believes the global IT industry has solid long-term growth potential, and industry revenue will expand by high single-digit percentages in 2022-2023. We believe that IT companies will most likely benefit from higher demand for cloud, cybersecurity and application services as customers continue to upgrade digital offerings as the business environment evolves,” it said.
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